Great Books

Charles Ellis: Winning the Loser's GameThink you can beat the pros? Don't be silly. You can't beat the pros in baseball or football, and you can't beat them in the stock market. Unless you play a different game.

Welcome

Thanks for your interest in the Wall Street Self-Defense Manual. The goal of the book (and site) is to help individuals invest more intelligently.

When I was a stock analyst, people often asked me what they should do with their money. Within the Internet sector, I often had some ideas. When the question was broader, however, I usually didn't. As a sector analyst, I didn't know what strategy made sense for any particular individual. Also, like many analysts, I knew more about how to invest intelligently in a single industry than how to invest intelligently overall.

I am no longer a stock analyst, and, thanks to a regulatory disaster (see below), I can no longer give personalized advice. But people still often ask me what they should do with their money. And after a few more years of experience and research, here's what I tell them:

Diversify your assets, reduce your costs, and get out of the way.

After a decade on Wall Street and five years off, I have (reluctantly) been persuaded that the smartest strategy for most individuals is NOT to pick stocks, time the market, study companies, pick funds, make forecasts, or do other things that smart investors are normally assumed to do. Rather, it is simply to diversify among multiple asset classes and let the markets do the work.

If you are like most people, you have probably heard this before but don't really believe it. How could investing in low-cost index funds--an easy way to accomplish the above--really be more intelligent than, say, picking a top-performing sector fund or studying Benjamin Graham? How could stuffing your portfolio full of dogs (half the stocks in an index usually perform worse than average) generate above-average returns? How could unmanaged index funds possibly do better than professional advisors or hedge fund managers who do nothing but pick winners all day? (Answer? Simple arithmetic.)

If this "secret" to intelligent investing is really true, moreover, why don't most people understand it? Why don't more of the investment "gurus" you know (and read about, and listen to, and watch) invest this way? Why are "indexing" and "passive management" still viewed as eccentric strategies, the province of academics and cranks? Why is your investment advisor still telling you he can pick superior stocks and funds?

In part because the "secret" is a relatively recent discovery (30 years or so) and in part because most people are not motivated to understand it. Most advisors are paid through fees and commissions, and "reducing costs and letting markets do the work" is not the best way to generate them. The investment media, meanwhile, can only write so many stories about the wisdom of low-cost indexing before they run out of things to say. And stockpicking, market timing, etc. are fun, while indexing is dull. So no one in their right mind would choose the latter strategy if they thought, as uninformed commentators often suggest, that it "guaranteed mediocrity."

But it doesn't guarantee "mediocrity." It guarantees an above-average return. And there is an easy way to lock in this return while still having as much fun as your stock-picking, fund-picking, guru-following, investment-media-consuming friends. The first step is to understand what most investors don't:

What drives returns (free-market capitalism and risk, not "stockpicking");

Why it is as important to be as savvy about buying investment products and services as you are about buying cars, houses, and other staples.

What misconceptions cause most investors to throw money away (examples: "Market forecasting is an intelligent activity."; "Mutual funds are cheap and safe."; "A good advisor will get me out before a crash."); and

Why most investors badly lag the markets (fees, costs, and mistakes).

Once you understand these things, you will have a framework for making smarter investment decisions. If desired, you will also be able to pursue a strategy that allows you to have your cake and eat it, too.

I've posted excerpts from the book on this site (see links at top right corner), and I'll post more over the next few months. I've also posted links to some online resources and further reading. Given my background, as well as the incendiary nature of some of the subject matter, some readers may want to share their thoughts on the blog section of this site. Please do. I can't provide personalized advice, but I'll try to respond to intelligent commentary, and the dialogue will make the next version of the book stronger.

A final note: As I describe in more detail in the book, after leaving Wall Street, I was party to an industry-wide regulatory complaint about the interaction between the research and investment banking functions at brokerage firms (for more information, please read the introduction or visit www.sec.gov). One side effect of this nightmare has been that I have never been able to publicly discuss my last few years as an analyst.I haven't done so in the book, either, but I want to be clear that my silence is not an attempt to ignore or disavow the seriousness of what happened. Everyone who listened to me in my Wall Street years deserves a full discussion of these issues, and someday, I hope, I will be able to provide it (preferably this century, preferably pre-humously).

MICHAEL MAUBOUSSINSmart, cross-disciplinary thinker who doesn't waste time predicting future, making trading calls, or being mostly bullish. Identifies what smart investors do that others don't.

JOHN BOGLEFounder of Vanguard and true hero for small investors. Appalled by the billions the investment industry pays itself each year for subtracting value. Has arguably done more for small investors than anyone in history.

WARREN E. BUFFETTOf course, but note why: Few predictions, no market timing, no trading, no strategy drift, and favorite holding period of "forever." Also note how utterly different this is than frantic trading and predicting that usually passes for "smart investing."